Can we use the tax classification of "disregarded entity" for our LLC if all owners live and work outside the US?


1

We have registered a US LLC to help us get a US bank account. We are based in the UK, however we have some suppliers we import from in the US and we have clients who will purchase from us in the US. Given that our US location is strategic and we have no operations there at the moment:

  1. Can we use the disregarded entity tax classification - D
  2. What form should we then fill out:

(a) W-8ECI - I am concerned about this:

Note: Persons submitting this form must file an annual U.S. income tax return to report income claimed to be effectively
connected with a U.S. trade or business (see instructions).
Do not use this form for:
? A beneficial owner solely claiming foreign status or treaty benefits

OR

(b) W-8BEN - I am concerned about this:

Do not use this form for: A person claiming that income is effectively connected with the conduct of a trade or business in the United States

So if we are to use D classification as opposed to C (corporation) then which form do you suggest I fill in, given I have concerns between the two?

Finance Tax Accounting IRS

asked Nov 9 '11 at 22:24
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Nikolay Piryankov
683 points
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2 Answers


1

A "disregarded entity" simply means that for US federal tax purposes, the entity (LLC) is disregarded as separate from the owner solely for tax purposes. In other words, the company's taxes are calculated as a part of the owner's regular income taxes rather than separately. (Wiki says the US LLC is comparable to a UK LLP in that the member(s) are responsible for taxes rather than the entity.)

Why? First, it's important to note that LLCs are a relatively recent invention (80s/early 90s) enacted by state statutes; not federal law. Thus, there was nothing in federal law or the IRS code specifying how LLCs should be treated. Over time, the IRS ruled that LLCs would be treated as partnerships, or disregarded and treated as a sole proprietorship.

Today, many LLCs are formed as single-owner disregarded entities. This gives individual business owners the advantages of an LLC (specifically, shielding the individual from the company's liabilities) while retaining the simplicity of sole-proprietorship income taxation.

Since the owner(s) of your LLC are not US residents and do not file US income taxes, you can't be a disregarded entity.

answered Mar 28 '12 at 12:02
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Josh3736
116 points

1

  1. Can we use the disregarded entity tax classification
No. The fact that all the LLC owners live and work outside the US is irrelevant for this question. The relevant issues in determining if your LLC is a disregarded entity are:

  1. The number of owners (members)
  2. Has your LLC filed Form 8832 Entity Classification Election to be treated as a corporation for federal tax purposes

The fact that you are saying "we" implies that the LLC has more than one owner. Only single member LLCs can be considered a disregarded entity, therefore this automatically disqualifies your LLC from being a disregarded entity. (I won't discuss the second issue I mentioned above since we have already determined that you cannot be a disregarded entity.)

In fact, the IRS forms you mentioned in your question state this. From page 3 of Form W-8BEN (instructions) and page 2 of Form W-8ECI (instructions), under definitions:

Disregarded entity. A business entity that has a single owner and is not a corporation under Regulations section 301.7701-2(b) is disregarded as an entity separate from its owner.

From Single Member Limited Liability Companies (IRS website):

A multi-member LLC can be either a partnership or a corporation, including an S corporation. To be treated as a corporation, an LLC has to file Form Form 8832, Entity Classification Election (PDF), and elect to be taxed as a corporation. A multi-member LLC that does not so elect will be classified under federal law as a partnership.


A single member LLC (SMLLC) can be either a corporation or a single member “disregarded entity”. Again, to be treated under federal law as a corporation, the SMLLC has to file Form 8832 and elect to be classified as a corporation. An SMLLC that does not elect to be a corporation will be classified by the existing federal guidance as a “disregarded entity” which is taxed as a sole proprietor for income tax purposes.

Also from the IRS website :

Section 301.7701-2(a) provides that a business entity is any entity recognized for federal tax purposes (including an entity with a single owner that may be disregarded as an entity separate from its owner under § 301.7701-3) that is not properly classified as a trust under § 301.7701-4 or otherwise subject to special treatment under the Code. A business entity with two or more owners is classified for federal tax purposes as either a corporation or a partnership. A business entity with only one owner is classified as a corporation or is disregarded ; if the entity is disregarded, its activities are treated in the same manner as a sole proprietorship, branch, or division of the owner.


Section 301.7701-2(c)(1) provides that, for federal tax purposes, the term “partnership” means a business entity that is not a corporation under § 301.7701-2(b) and that has at least two owners.


Section 301.7701-2(c)(2)(i) provides, in general, that a business entity that has a single owner and is not a corporation under § 301.7701-2(b) is disregarded as an entity separate from its owner.


Section 301.7701-3(b)(1) provides generally that in the absence of an election otherwise, a domestic eligible entity is (a) a partnership if it has at least two members, or (b) disregarded as an entity separate from its owner if it has a single owner.

From Wikipedia :

Unless an election is made on Form 8832, a domestic eligible entity will be classified by default as:


  1. A partnership if it has two or more members.
  2. Disregarded as an entity separate from its owner if it has a single owner.


Unless an election is made on Form 8832, a foreign eligible entity will be classified by default as:


  1. A partnership if it has two or more members and at least one member does not have limited liability.
  2. An association taxable as a corporation if all members have limited liability.
  3. Disregarded as an entity separate from its owner if it has a single owner that does not have limited liability.


The effect of these rules is that a U.S. limited liability company (LLC) or limited liability partnership (LLP) is treated by default as a partnership (or disregarded entity if it has only one owner), whereas a foreign LLP is treated by default as a corporation (if, as is generally the case, all its members have limited liability).

The following page from the IRS website may also be helpful: Classification of Taxpayers for U.S. Tax Purposes.
answered Mar 29 '12 at 04:18
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Zuly Gonzalez
9,194 points

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